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Date Posted: 11:27:27 06/04/04 Fri
Author: Katherine
Subject: Re: I really need help..please help ASAP
In reply to: Katherine 's message, "I really need help..please help ASAP" on 11:24:45 06/04/04 Fri

>Q1) Your company is considering a project to expand
>its distribution system. The project has a net present
>value of $8.7 million,an internal rate of return of
>11.4%, an average accounting return of 3%, and a
>payback period of 6.5 years. Your asked to discuss
>the meaning of these differnet investment criteria.
>
>a)For each of the investment criteria identify two
>positive features and two negative features of the
>measurement.
>
>b)Looking at all four measurements, simultaneously,
>explain if your recommendation would be to proceed
>with the project, or not. Be specific and consider
>each of the four meadurements with in your answer.
>What is your final recommendation?
>
>Q2)You are the CFO of S airlines, a regional carrier
>providing service between New York and Boston, and
>Caribbean. You have just spent $250,000 to upgrade
>the interior of one of your turbo-props. Now you must
>consider whether or not to swap your turbo-prop for a
>large business jet that can fly farther and faster
>than your turbo-prop, but carries fewer passengers.
>You can get $600,000 for your turbo-prop in today's
>market. The business jet costs $3.4 million and can
>be depreciate over 20 years(straight line
>depreciation). YOu will lose $300,000 a month in
>business if you sell the turbo-prop, by carrying fewer
>passengers. You will gain $675,000 a month revenues
>from the jet. Operating cost are the same for both
>planes. But the jet consumes an extra $20,000 per
>month in fuel. You will sell the after five years for
>$1.3 million. The corporate tax rate is 35%. Your
>airline is valued at
>$26 million. There is one class of common stock with
>on million outstanding shares valued at $8 per share.
>YOur required return on equity is 13.75%. YOu owe a
>bank loan of % 5 million for which you pay 12.25%.
>The rest of your debt is held by bond holders who
>receive 8.75%.
>
a)what is your firm's WACC?
>
b)Should you swap the turbo-prop for the jet?

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